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DUBLIN, Ohio-American Share Insurance closed the books on 2004 with strong growth and record assets in its primary insurance fund. “ASI finished its 30th year of operations with another strong year of growth. Fund assets grew 12%, reaching a record level of $226 million at year-end 2004,” ASI President and CEO Dennis Adams wrote in his introduction to the company’s 2004 Financial Profile. “Losses from failed institutions were immaterial in 2004; however, the company continued to commit significant resources to its risk monitoring and field examination functions, while aggressively funding reserves for future possible losses.” ASI’s net losses in 2004 came to just $18,231. In all, ASI has only experienced $9 million in net losses in 30 years of business. “ASI finished 2004 with total insurance-in-force of over $12.9 billion in primary insured member credit unions,” according to the report. “However, when this growth is combined with a relatively low return on invested funds and an increasing cost of monitoring a diverse and complex pool of insured credit unions, the results are a downward pressure on the fund’s equity ratio.” ASI’s equity to primary insured shares has remained stable since year-end 2004 at 1.29%. Adams explained, “With the support of the members, the board adopted a target range of 1.30% to 1.50%.” He said the fund “took a hit” when then-over $2 billion Patelco Credit Union switched to ASI in 2002. However, Adams said, “We’re not considering any premium or dividend at this time.” ASI has a sliding scale for deposits by member credit unions: CAMEL 1s pay 1%, CAMEL 2s pay 1.1%, and so on. With the average credit union deposit at 1.06%, most of the member credit unions are 1s and 2s, Adams said. The report also explained that the primary insurance fund is diversified geographically as well as by the industry of the credit unions’ primary sponsors. ASI was able to generate a net income for its 30th consecutive year at 1.22% pre-tax return on average assets. But ASI’s credit unions were not as prosperous, judging by ROAA. ASI member credit unions had an ROAA of 0.84%, below the national average of 0.92%, which the report chalks up to low interest income on investments. “Credit unions are having trouble generating the net income,” Adams said. With yields on assets down, they are squeezing credit unions’ cost of funds. The report echoed this thought, stating, “Management generally was not as effective in maintaining profits by controlling operating expenses as in previous years, as the sum of operating expenses and provision for loan loss expenses (as a percent of average assets) increased from 3.18% to 3.31% in 2004.” However, it added, “Despite the current economic environment and the variety of challenges facing member credit unions in 2004, ASI remains a sound and stable fund. In 2005, we anticipate market rates of interest to continue the slow but steady increase noted in 2004. This should be very helpful in enhancing the fund’s equity ratio in the years(s) ahead through improved savings.” The report also showed ASI credit unions with a net capital ratio of 10.74%, just slightly below the national average of 10.91%. Further, Adams said, “The bigger credit unions seem to be doing OK and the smaller credit unions tend to be struggling more.” He emphasized that this was just his observation, but he believes the trend will lead to more voluntary mergers because the value of economies of scale is showing itself. Adams also expressed concern about credit unions’ concentration in general in the real estate market over the last few years. More than half, 53%, of ASI’s total member credit union loans are in real estate, up from 43% at year-end 2000. “I’m a little more old school than some and it concerned me,” Adams admitted. He added that not all of those are out in 30-year fixed mortgages and a “big portion of them are in adjustable rate mortgages and five-year balloon notes.” But, he added, “It’s still a lot of money in one bucket.” The variety of maturities helps mitigate interest rate risk, he explained, but not credit risk. When consumers go to refinance, they may not be able to afford it, Adams said. “Our auditing and risk management people told me not to worry too much about it,” he said. The concentration in the real estate market has extended overall loan maturities and led credit unions to restrict the length of their investments. ASI credit unions’ loan-to-share ratio stood at 72.48% and delinquencies at 0.68% at year-end. Between ASI and Excess Share Insurance, a wholly-owned subsidiary of ASI that provides coverage over primary coverage, ended the year with insurance-in-force at 362 credit unions in 32 states plus Washington, D.C., according to the 2004 Combined State of the Funds Report of Excess Share Insurance Coverage. Total excess insurance-in-force between ASI and ESI was $5.1 billion, representing an 18.6% jump in coverage. Prior to ESI’s start up in 1993 and still in some markets, ASI offered excess insurance. Since 1993, the number of credit unions has increased 19% a year on average and insurance-in-force has been up 24% on average “evidence of the popularity of the program,” the combined report said. [email protected]

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